Jaguar Mining: When The Market Tells You To Run

Jaguar Mining (JAG) is in a state of extreme turmoil after the company concluded their strategic review process on May 8, 2012. Many shareholders remained optimistic of the chances of a buyout even though the market priced this declining stock perfectly. We were first attracted to this stock because of their undervalued gold resources which we quickly realized the reason for the undervalued assets, management is completely horrible. They continued to promise the quick turnaround of the business just to continue to disappoint shareholders over and over again.

Shandong Gold Bid Rejection

Management gave investors this reason for not taking the Shandong Gold bid, "When the proposal was received from the Shandong Gold Group in November 2011, the Board determined that it was not in the best interests of the Company and its shareholders to accept that proposal. The Shandong Gold proposal was structured so as to effectively provide Shandong Gold with an option to purchase the Company as it conducted due diligence and sought government approvals, including those required in China, while preventing the Company from exploring other alternatives. In addition to Shandong Gold, two other parties, including the North American based mining company referred to below, had expressed interest in acquiring the Company in the fall of 2011. These interested parties emerged as a result of the Company's practice of maintaining contact with various mining companies who might be interested in acquiring the Company if the opportunity arose."

I think all the shareholders would agree that management dropped the ball considering this offer. Jaguar lacks the financial position to be able to develop the Gurupi project with less than $50 million of cash and over $300 million of debt and should have found a buyer with an estimated 6,541,510 ounces of measured and indicated gold mineral resources contained in 104,264,770 tonnes of material at an average grade of 1.95 grams per tonne, and 1,747,050 ounces of inferred gold mineral resources contained in 28,572,780 tonnes of material at an average grade of 1.90 grams per tonne.

Managements Capital Spending Program

Management states in their 2012 first quarter management discussion and analysis, "The estimated $59.3 million capital spending required for the remainder of 2012 includes approximately $19.3 million for equipment purchases at the Turmalina and Caeté operations. The Company expects a portion of this amount will be offset with the transfer of equipment from the Paciência operation, which has been placed on temporary care and maintenance. The Company believes that its cash held in accounts, cash flow generated by operations, debt, and other identified sources of capital are sufficient to finance its operations for the foreseeable future."

This is a very aggressive spending program considering their current financial position. With the current distractions of management changes and Bristol Investment partners attacking management, we are expecting JAG to release horrible operational results for at least the remainder of 2012.

Bristol Investment Partners vs. Management

In response to the results of Strategic Review Bristol Investment Partners wrote a very detailed letter to management on June 13, 2012 accusing them of many wrongdoings.

Jaguars management and Bristol Investment Partners continue to argue over the alleged wrongdoing with the old CEO, Dan Titcomb, filed a lawsuit alleging that his termination occurred as a result of a change of control and is therefore entitled to three years of compensation plus three years of bonus. He is also claiming an unspecified amount of damages under applicable New Hampshire employment laws. Jaguar and its directors believe the claim to be without merit, will vigorously defend this lawsuit and will take any steps necessary to protect Jaguar's interests. Jaguars management has stated they intend to proceed with a counterclaim against Mr. Titcomb for, among other things, breaches of his fiduciary duties to the Company prior to his termination.

Resignation of Directors

Bristol applauds the prompt resignation of Gary German from his duties as Chairman of Jaguar's Board of Directors. In similar fashion, Bristol expects the Board to promptly accept the tendered resignations of Messrs. German, Clausen and Andrews. Anything less than immediate action in accepting their already-tendered resignations will be perceived by Bristol as disenfranchising behavior by Jaguar's Board. Bristol reminds the Board that Jaguar shareholders expect their clear voice to be respected and cautions the Board against any actions which could be interpreted by Jaguar shareholders as ignoring their clearly expressed will.

Conclusion

There could still be value in this company but the risk seems too high. They do have a significant amount of resources which could be profitably mined by a competent management team. Bristol has significantly reduced their position from 7,285,706 shares on June 13, 2012 to 4,985,684 on July 5, 2012. If Bristol felt they could recoup their losses on this investment they would be adding to their position not exiting. We have learned a valuable lesson that management decides the future of the business not the assets. This could be a potentially profitable short position but if the FED announces QE3 I would expect the "Risk On" trade to send this stock higher. We are going to remain on the sidelines indefinitely regarding Jaguar Mining and I suggest you do the same.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.